We all have names. They're special to us. Sometimes, a name does more than simply provide a label -- it helps to define one's identity. Occasionally, we change our names. A person might pick up a nickname; another might make a formal name change.
These notions apply to businesses as well. But when a company changes its name, it can sometimes create confusion for investors.
Oftentimes, a business name change is part of a rebranding strategy. In some cases, it's meant to highlight a new vision, as was the case for the company formerly known as Facebook and now known as Meta Platforms.
Image source: Getty Images.
Facebook's success gives way to Meta Platforms' struggles
Facebook was one of the most successful stocks of the last decade. Between its initial public offering (IPO) in 2012 and its name change announcement in October 2021, Facebook shares gained an impressive 797%. Since the 2021 name change, share prices are down 61%.
To be sure, some of this price drop is coincidental and can be chalked up to bad timing. The last 15 months have seen many tech stocks, including several of Meta Platforms' competitors, lose significant stock value over concerns about rising interest rates and the potential for a recession. And yet, there is also solid evidence that Meta's slump is at least partially self-inflicted.
NASDAQ: META
Key Data Points
A new beginning or an unpleasant reminder?
Meta Platforms' CEO, Mark Zuckerberg, has updated his vision for the social media giant: He now wants to make the concepts of a metaverse into a reality and make his company a major gateway into the developing metaverse.
Making that vision a reality will be expensive -- very expensive. Over the last four years, Meta allocated an estimated $36 billion toward the development of Reality Labs -- the segment tasked with creating the metaverse. That's a shockingly large amount of cash, particularly since even Meta admits the project won't be profitable anytime soon.
This change in focus has investors worried. Similarly, the name change is a signal that the company is all-in on the metaverse. After all, changing your legal name isn't something you do unless you're serious.
In this case, the new name seems to be counterproductive. What many investors liked about Facebook was its fat margins -- built on the company's plentiful ad revenue. But operating margins have fallen from 50% or more back in 2018 to just under 30% currently and potentially getting worse in the near term.
META Operating Margin (TTM) data by YCharts
By focusing time, attention, and money on an unprofitable project, investors are concerned that Meta has taken its eye off the ball (generating profits). Worse still, its name change only reminds investors that management will not easily give in to pressure to get back to basics.
Is Meta Platforms a buy?
Despite all the bad news, Meta's stock has performed well recently with share prices up about 36% over the last two months. Yet investors saw similar small bounces over the last year, and despite those signs of strength, Meta shares are down a breathtaking 61% from one year ago.
I'm still skeptical that the fundamental story has changed. Mark Zuckerberg remains the key figure, owing to Meta's unique governance structure. And while there have been hints that the spending spree might be slowing to again focus on profitability, there's been no true pivot from the top. Until that happens, I'd suggest new investors stay on the sidelines of this stock.
